Earnings Preview: March Madness On Wall Street

College basketball may not be the only madness as three potentially volatile days face traders.

Tuesday starts with Goldman Sachs (GS) and then transitions into Fed watch. The statement from the March meeting should be released around 2:15 ET, give or take five minutes. Wednesday follows with earnings from Morgan Stanley (MS). Then comes Thursday with Bear Stearns' (BSC) numbers and a conference call that will be very interesting, to say the least.

Of course, these aren't the only things scheduled for the week.

We have confirmed quarterly earnings reports for 144 companies, including 16 S&P 500 members. In addition to the aforementioned brokerage firms, Adobe Systems (ADBE), Discover Financial (DFS), Fedex (FDX), GameStop (GME), KB Home (KBH) and Nike (NKE) are on the calendar.

On the economic front, the Federal Reserve will meet on Tuesday, Mar 18. A 75-basis point cut is very possible, though a 50-basis point cut is not out of the realm of possibilities. Given Friday's news about Bear Stearns needing liquidity and the tame inflation numbers, I think we will see a 75-basis point cut.

Here is a listing of the other economic data.

• Monday: March New York Fed manufacturing survey, February industrial production and capacity utilization, March National Association of Home Builders survey, fourth-quarter current account balance (this last one could impact how the dollar trades)
• Tuesday: February Producer Price Index (PPI), February housing starts
• Wednesday: Mortgage Banker's Association index
• Thursday: February Conference Board's Leading Indicators, March Phili Fed survey

First round games for the NCAA men's college basketball tournament start on Thursday.

The U.S. equity markets will be closed on Friday, Mar 21, in observance of Good Friday. Have a happy Easter.

Companies That Could Issue Positive Earnings Surprises during the Week of Mar 17 - 21

GameStop (GME) raised its fourth-quarter earnings guidance last month. The retailer anticipates profits of $1.11 to $1.12 per share. Strong demand for video games led to same-store sales growth of 17.4%. Five brokerage analysts adjusted their projections as a result, leading to a consensus earnings estimate of $1.12 per share. GME has surpassed expectations for four consecutive quarters. GameStop is scheduled to report on Tuesday, Mar 18, before the start of trading.

The consensus estimate for WellCare Health Plans (WCG) is holding at $1.58 per share, despite recent warnings from two other insurers. The quarterly consensus earnings estimate for WCG is two cents higher than the average forecast of a week ago. Furthermore, the insurer has a history of beating expectations, having issued positive earnings surprises for more than 10 consecutive quarters. WellCare is scheduled to report on Thursday, Mar 20, before the start of trading.

Companies That Could Issue Negative Earnings Surprises during the Week of Mar 17 - 21

Morgan Stanley (MS) has missed earnings expectations for two consecutive quarters. Forecasts for the firm's fiscal first-quarter have fallen 31 cents over the past 30 days to $1.13 per share, reflecting downward revisions by more than half of the covering brokerage analysts. Morgan Stanley is scheduled to report on Wednesday, Mar 20, before the start of trading.

First-quarter estimates have also been falling on Bear Stearns (BSC) and Goldman Sachs (GS). Given Friday's announcement about BSC's liquidity problems, the firm's financial status will be more important than its earnings announcement. GS has not missed earnings expectations since 2005, though the trend in estimate revisions suggests this streak is at risk of being broken.

Charles Rotblut, CFA is the senior market analyst for Zacks.com. He can be reached at [e-mail]

Comments

[tradersystemguru]

I have two issues with the above analysis. First, at this point whether the Fed cuts 25 or 75 basis points is pretty much moot. Based on past response, pumping more liquidity into the system has proven little more than a politically soothing placebo. Take a look at how the markets responded in 2001 when the Fed aggressively cutting rates (from 6.5% to 1%) and all the while, stocks fell - the S&P dropped more than 50% ( see tradesystemguru.com/co... ) Compare the chart of 2001-02 with 2007-2008. Then take a look at Japanese stocks while the BOJ cut rates to zero. Other than at least three bear market rallies of 50% or more, the Nikkei continued to fall and at last check was trading around 12,000, still 70% below its lofty heights in 1989-90 (and 30% below its 2007 high).

My point is that pumping liquidity into the system will have minimal effect if the problems are based on widespread insolvencies. Its like throwing a pail of water on a house fire. (See my list of six reasons why the latest Fed action will also likely fail at tradesystemguru.com/co... )

Regarding earnings, I prefer to follow the more than 4000 companies tracked by the Wall Street Journal. As of March 13, a total of 3596 companies have now reported Q4-07 earnings on Wall Street (up from 3399 companies last week). Average improvements fell again to -56% (from -55% last week) versus the same quarter the year before indicating that the earnings picture is certainly not improving. This compares to a drop of 21% (4205 companies) at the end of Q3-07 reporting season and a 13% jump in Q2-07. This is the real story behind earnings. (See chart 4 at tradesystemguru.com/co.../ )

The takeaway here is that is fine and dandy to follow various S&P earnings results, surprises and disappointments and PEs etc. but it's the trends or rates of change that really matter. Earnings have been rapidly deteriorating and that is bad news whichever way you shake it.

Matt Blackman - TradeSystemGuru.com